The aim of this standard is to establish principles for financial reporting by entities that have an interest in arrangements that are being jointly controlled (i.e. joint arrangements).
This standard is applicable to all those entities that are party to a joint arrangement.
Definitions of Important Terms
It can be defined as an arrangement that is controlled jointly by two or more entities.
It can be defined as the sharing of control agreed through a contract/ agreement by the parties to an arrangement. This only exists when decisions pertaining to relevant activities of an arrangement require unanimous approval of the participants/ entities that share control of that arrangement.
It is an arrangement in which the participants control the arrangement jointly and have obligations for the arrangement’s liabilities as well as the rights to its assets.
Any entity that is a party to a joint operation and has joint control of the activities of that operation.
It is an arrangement in which participants jointly control the arrangement and have the rights to the arrangement’s net assets.
Any entity that is a participant of a joint venture and also jointly controls such an arrangement.
Participant of a Joint arrangement
Any entity that is a participant of an arrangement that is controlled jointly, irrespective of whether that entity jointly controls the arrangement or not.
It can be defined as a financial structure that is separately identifiable, including entities that have a separate legal structure or entities that are recognized by law, irrespective of whether the said entities have a legal personality.
The main characteristics of an arrangement like this are as follows:
- The parties to the arrangement are bound by contractual agreement.
- The contractual agreement/ arrangement provides entities the power to control the arrangement jointly.
An arrangement that is controlled jointly is either a joint operation or a joint venture.
The contractual agreement on which the joint arrangement is based deals with the following matters:
- The purpose, objective, and activity of the arrangement.
- How the members of the board or other equivalent governing body, of the arrangement, will be appointed.
- The decision-making process. In some cases, the process for making decisions agreed upon in an agreement by the participants to an arrangement leads to joint control. For example, if two parties agree to an arrangement in which each party has 50% voting rights and the agreement between the two parties/ entities states that a minimum of 51% of the voting rights is needed to make decisions regarding relevant activities. As per the above-mentioned scenario, the entities have implicitly made an agreement to control the arrangement jointly as decisions regarding the arrangement’s relevant activities and operations cannot be made without the agreement of both the entities.
- The capital or other contributions required from the parties to the arrangement.
- The sharing of assets, liabilities, income, and expenditures of the joint arrangement among its participants.
Any entity that is part of an arrangement should examine whether the contract/ agreement on which the arrangement is based provides all the entities or a group of entities that are parties to the arrangement, joint control of that arrangement (in accordance with the definition of control mentioned in International Financial Reporting Standards 10 Consolidated Financial Statements). All the entities, or a group of entities, control the arrangement jointly when they are required to act collectively to direct all those activities that significantly influence or impact the arrangement’s returns from the relevant activities.
After the assessment, if it is determined that the arrangement is being controlled jointly by two or more entities then in such a scenario the entity should then determine whether it has the power and the rights to jointly control the arrangement.
In a joint arrangement, a single party cannot control the arrangement just on its own. An entity jointly controlling an arrangement can stop any other party or a group of parties, from controlling the activities and operations of the joint arrangement.
An arrangement can be considered as being controlled jointly by entities even if all of the entities that are participants of the said arrangement do not enjoy joint control of it. This standard helps in distinguishing between parties that jointly control an arrangement (joint venturers or joint operators) and participants that do not jointly control an arrangement.
An entity will have to apply judgment when examining whether all the entities or a group of entities, control an arrangement collectively. An entity should make this assessment by taking into account all the underlying factors and conditions.
If three entities initiate a business arrangement in which party A has 60 % voting rights while party B and party C has 35% and 15% respectively. The arrangement between the three entities states that at least 65% of the voting rights are needed for making decisions regarding the relevant activities and operations of the said arrangement. Even though party A can stop any decision, it does not have sole control of the arrangement because it needs the support or agreement of party B. The terms of the arrangement requiring at least 65% voting rights for making decisions regarding the arrangement’s activities and operations basically imply that party A and B have joint control of the said arrangement as decisions regarding relevant activities cannot be made without the agreement of both the parties.
Types of Joint Arrangement
An entity should assess and determine the type of joint arrangement to which it is a party to. Classifying an arrangement either as a joint venture or a joint operation mainly depends on the rights and obligations of the entities that are parties to that arrangement. Information regarding the rights and obligations of the aforementioned arrangements have been provided in their definitions.
An entity can assess its rights and obligations arising from the arrangement by considering the legal form and structure of the said arrangement, the terms of the contract of the arrangement that has been agreed by the entities that are parties to the arrangement and, when relevant, other factors and conditions.
Assets and liabilities pertaining to an arrangement that is kept in a separate vehicle can either be a joint operation or a joint venture.
Any joint arrangement that is not structured using a separate vehicle is considered to be a joint operation. In such cases, the contract on which the arrangement is based establishes the participants’ obligations for the liabilities and rights to the assets, pertaining to the arrangement, and the participants’ obligations for the corresponding expenditures and rights to the corresponding revenues.
Financial Reports of Participants of a Joint Arrangement
An entity should recognize the following with regards to its interest in a joint operation:
- its share of the income from the sale of the output by the joint operation;
- its income from the sale of its share of the output arising from the joint operation;
- its expenditures, including its share of any expenditures that have been jointly incurred;
- its assets, including its share of any assets held jointly; and
- its liabilities, including its share of any liabilities incurred jointly.
Any entity that is a participant of an operation that is being controlled jointly should take into account all the assets, liabilities, income, and expenditures pertaining to its stake in such an arrangement in compliance with the requirements of the International Financial Reporting Standards (IFRSs) applicable to the specific assets, liabilities, income, and expenditures.
When any entity acquires an interest in an operation that is being controlled jointly by entities that are participants of such an arrangement and the activity of the said operation constitutes a business, as stated in IFRS 3 Business Combinations, then all the principles specified for the accounting of business combinations mentioned in International Financial Reporting Standards 3 and in other relevant IFRSs should be applied except for the principles that are in contradiction with the guidance provided in International Financial Reporting Standards 11. These requirements are applicable to both the initial interests and additional interests in a joint operation in which the activity of the operation constitutes a business.
Any entity that is a party to a joint operation but does not have joint control, should take into account its interest in such an operation in accordance with the requirements specified in IFRS 3 regarding accounting for business combinations unless it collides with guidance mentioned in IFRS 11 only if the entity has obligations for the liabilities and rights to the assets, relating to the said joint operation.
An entity should recognize its stake in an arrangement like a joint venture as an investment and should present that investment in its financials through the use of the equity method in compliance with the requirements of IAS 28 Investments in Associates and Joint Ventures except for the circumstances in which the entity is not required to apply the said method as stated in the aforementioned standard.
An entity that is a party to a joint venture but does not jointly control the said arrangement, should take into account its stake in such an arrangement in compliance with the requirements of International Financial Reporting Standards 9 Financial Instruments unless it has the influence/ power over the joint venture, in which case it should treat the said interest in compliance with the requirements of International Accounting Standard 28.
Separate Financial Statements
The same accounting treatment is required which has been set out above for a joint operator under the heading financial reports of participants of a joint arrangement.
A joint venture should account for its interest in compliance with the requirements of International Accounting Standard 27 Consolidated Financial Statements and Accounting for Investments in Subsidiaries (as amended in 2011).
Any entity that participates in, but does not jointly control an arrangement like a joint venture should account for its interest in such an arrangement in compliance with the requirements of International Financial Reporting standards 9. However, if an entity has significant power/ influence over the joint venture then that entity should apply International Accounting Standard 27 (as amended in 2011).